I don’t know where Sen. Grace Poe and other critics are coming from when they tossed the blame for the current state of the Philippine economy to the Bangko Sentral ng Pilipinas (BSP).
Senator Poe has conveniently glossed over the almost daily killings of perceived enemies of the state, and the profanities oozing out of the mouth of President Rodrigo Duterte as he lashes out at the Catholic Church with increasing intensity and frequency.
To be clear, the BSP is not really a member of the economic team. To put it more accurately, the government’s economic team is composed of members of the President’s Cabinet, with the governor there only by virtue of the BSP’s strategic role as central bank which is an independent institution.
Aside from external factors, the Philippine economy is sensitive to general perception. This is the area where the Duterte factor weighs in big time. In the eyes of local and foreign investors, a lawless Philippines is not exactly a palatable place to park their funds in. It doesn’t help that the country’s chief economic architect, Secretary Ernesto M. Pernia, recently said that the latest high inflation figure was “unexpected and could dampen economic growth.” During the deliberation of the tax-reform measure or the Tax Reform for Acceleration and Inclusion (TRAIN), it has already been established that some of its provisions were inflationary.
The country’s inflation rate reached 5.2 percent in June, from 4.6 percent the month before. June’s figure was the highest in five years, piercing the upper limit. Remember that the Department of Finance version, on which the inflation bearing was modeled, had no coal tax and was bereft of the lifting of the value added tax-free status of power transmission. This resulted in costly electricity bills. Whose fault was it? The Senate did not foresee it and the President, busy with eliminating dissent, should have disallowed it to safeguard the reliability of the tax-reform law.
Looking back, however, the country is no stranger to high inflation rates. From 1993 to 2001, inflation was at 7.4 percent yearly. Between 2003 and 2010 it was at 5.5 percent, well above targets. And don’t forget that during BSP Governor Amando Tetangco’s time, inflation went past 6 percent several times. But why is it that only during Duterte’s reign did inflation seem to have shrunk our food table? Current financial difficulties are being compounded by political uncertainties.
Minus the Duterte factor, the inflation spike in 2018 is driven by the following supply-side influences: oil price surge; excise taxes under TRAIN, and food supply disruptions, especially on rice, corn, fish and vegetables. This was amplified by peso depreciation triggered by widening trade deficit due to fast growth and by capital outflows due to Fed normalization. Strong domestic demand also gave opportunity for business to pass on to customers, rather than absorb, their higher cost.
Governor Nestor Espenilla told BusinessWise that the BSP responded by guiding market interest rate upward, initially by “open mouth policy, then more recently by two sequential 25 basis point policy hikes.” The move, in effect, dialed down economic activity, thereby easing peso- depreciation pressure, and cooling inflationary expectations. He said that the BSP would “continue with this for as long as necessary to guide the deceleration of inflation back to within target 2 percent to 4 percent by 2019.” He admitted, though, that such target would no longer be possible for 2018, and that inflation should peak by August.
“We are measured and deliberate about rate hikes to preserve the momentum of economic growth. That is vital to continued market confidence,” he explained.
External developments, policy normalization in the United States, and tariff wars launched by US President Donald J. Trump have exacerbated exchange-rate pressures and added to monetary-policy burden.
The required rate of return (RRR) reduction is not inflationary because the corresponding liquidity released were all easily absorbed back. This is due to foreign-exchange operations to manage peso volatility (BSP dollar sales drain peso liquidity from the system). In addition, the BSP stepped up open market operations through term-deposit facility auctions.
Espenilla said that the BSP carefully monitors and regulates overall system liquidity so there is just enough—neither too tight nor too loose—to support the economy.
Many armchair analysts factor in only the obvious liquidity release from the RRR cut, but fail to consider the overall liquidity situation after considering countervailing factors, such as foreign exchange sales and term-deposit facility auction.
According to Espenilla, “Some people also stress about the decline in gross international reserve [GIR]. The truth is that we have excess GIR accumulated when there was a lot of capital inflow during Quantitative Easing [QE] period [An expansionary monetary policy to stimulate the economy. It typically involves the Central Bank buying short-term government bonds to lower short-term market interest rates].”
He noted that this was dammed up in the GIR to prevent these from creating asset bubbles in the economy. “It was always the idea to use the excess GIR when the flows start reversing as is happening now. Before QE, normal GIR buffer level is only at a minimum three months’ worth of imports. Currently, we are at around seven months. So we have a buffer to use for stabilizing peso volatility due to external uncertainties. This is what the GIR is for, a stabilizer.”
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